Investing August 23, 2016

Retirement Plans Driving Wider R6 Share Offerings

Institutional investors, including employer-sponsored retirement plans, are generating significant demand for inexpensive and transparent investment vehicles. 

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A recent Cerulli Associates survey finds investment firms expect to see the biggest increase in use of I-shares, R6-shares, and “platform/wrap share classes.”

According to the latest issues of The Cerulli Edge U.S. Monthly Product Trends Edition, mutual funds endured outflows of $9.8 billion during July, marking the second straight month of outflows. Despite that, Cerulli data shows capital market performance was strong enough to propel asset growth to 2.5%, ending the month at $12.5 trillion.

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“After tepid growth in May and June, ETF assets jumped 5.5% in July, to finish the month at $2.36 trillion,” Cerulli explains. “While global market performance was a key driver, massive July flows of $45.9 billion were also a contributor.”

One clear overall theme continuing this year has been the shift in assets to lower-cost share class offerings. Firms expect to see the biggest increase in use of I-shares, R6-shares, and/or a platform/wrap share class—64%, 55%, and 50%, respectively. Additionally, financial advisers report that while 23% of their 2015 practice sales came in A-shares, they expect to substantially increase their use of platform and institutional share classes this year and beyond.

“Amid a persisting trend toward lower cost and more transparent share classes, as well as the recent Department of Labor (DOL) Conflict of Interest Rule, the R6 share, which typically has no revenue sharing (e.g., 12b-1 fee, sub-TA fee), has witnessed significant asset growth,” Cerulli says. “Moreover, the low-cost and transparent attributes of the share class resonates with DC plan sponsors to the point that 64% of asset managers view large DC plans as the most popular channel for the R6-share class.”

NEXT: A positive trend for individual investors, too 

According to Cerulli, the industry’s focus on low-cost pricing, “demand from intermediaries for the lowest priced share class, retirement plan sponsors’ efforts to offer lower costs, the Department of Labor Conflict of Interest Rule, and now the SEC’s 2016 share class initiative should all be enough reason for firms to scrutinize their share class offerings.”

“Firms continue to offer an alphabet soup of share classes, but assets have shifted to lower-cost offerings,” Cerulli finds. “According to Morningstar, institutional share classes represented 31% of assets at the end of 2Q 2016, up from 16% in 2006. Conversely, A-shares made up 16% of assets at the end of 2Q 2016, down from 28% in 2006.”

Cerulli suggests this phenomenon is confirmed through net flow trends and the firm’s 2016 proprietary Economics of Product Development and Pricing Survey, in which asset managers report that I-shares made up an average of 49% of gross sales over the last 12 months.

Looking deeper at net flows the picture grows even clearer: “Institutional and retirement share classes brought in positive net flows in 2015 and June 2016, $143.5 billion and $125.1 billion, respectively, while A-shares had outflows of $91.3 billion and $68.9 billion for the same time frames. Cerulli continues to believe that core share classes will prevail—a lean institutional share class, a non-12b-1 share class for platforms and wraps, a classic 25-basis-point share class, and a bare-bones retirement share class exclusive of a servicing fee (sub-accounting transfer agency fee).”

More information on obtaining Cerulli research is available here. 

Data and Research August 23, 2016

Americans of All Ages Are Worried About Retirement

While only 18% of Millennials are confident in their golden years, they are the generation best positioned in terms of retirement savings.
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Whether referring to Baby Boomers, Generation X or Millennials, Americans of all ages are worried about having enough money to fund their retirement, according to research by the Transamerica Center for Retirement Studies.

Forty-five percent of Baby Boomers expect their standard of living will decrease in retirement, 83% of Generation X think their generation will have a harder time achieving financial security than their parents, and only 18% of Millennials are very confident about their future retirement.

Sixty-one percent of workers say they have not fully recovered from the Great Recession, 13% have not started to recover, and 7% think they may never recover. Seventy-seven percent of workers think that Social Security will  not exist when they retire, only 51% of workers think they are building an adequate nest egg, and 65% think they could work until age 65 but still not have enough saved to meet their needs in retirement.

“Today’s workers are grappling with retirement security and are challenged by the wobbly three-legged stool comprising Social Security, employer-sponsored retirement benefits and personal savings,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “Amid retirement savings shortfalls, American workers are attempting to prop up our system’s three-legged stool by adding a fourth leg: working during retirement.” The survey found that 38% of workers expect to work during their retirement.

NEXT: Baby Boomers’ outlook
Sixty-six percent of Baby Boomers plan to or are already working past age 65—or don’t expect to ever retire. Eighty-seven percent of Boomers are expecting Social Security to fund some of their retirement needs, and 34% expect it will be their primary source of income. Seventy-eight percent believe retirement accounts or other savings and investments will fund their retirement, but only 34% say they have a traditional pension plan.

The average household savings of all of their retirement accounts is $147,000. Transamerica notes that the average balance may be low because 401(k) plans were introduced when Boomers were already mid-career.

“Baby Boomers are the generation that has rewritten societal rules at every stage of their life,” Collinson says. “Now, Baby Boomer workers are redefining retirement by planning to work until an older age than previous generations. Baby Boomers’ vision can only be achieved if they are proactive about staying employable and if employment opportunities are available to them. As part of their retirement planning, Baby Boomers should create a Plan B if retirement happens unexpectedly due to job loss, health issues or other intervening circumstances.”

Among Generation X, 77% are saving for retirement and started saving at the average age of 28, deferring an average of 7% of their salaries. Unfortunately, 30% have taken a loan or early withdrawal from retirement savings, with commonly cited reasons relating to paying off debt or unplanned major expenses. This may be related to the fact that they have only $5,000 in emergency savings, on average. Their average retirement balance is $69,000, and only 12% are very confident that they will retire with a comfortable lifestyle.

“Generation X entered the workforce in the late 1980s and is the first generation to have access to 401(k) plans for the majority of their working careers,” Collinson says. “As such, they are early adapters who had to learn from their own experience without precedents to help guide their way. Generation X has fallen behind on their retirement savings, but they still have time to catch up and improve their retirement outlook if they begin focusing on it right now.”

Among Millennials, 72% have started saving, on average at the young age of 22. Among those who are offered a 401(k) plan, 72% are contributing to it at an average rate of 7% of their salaries. Thirty percent are saving more than 10%, and their average retirement savings balance is $31,000.

However, 72% say they do not know as much as they should about retirement investing, and 22% say the majority of their savings are in bonds, money market funds, cash or stable value funds. Seventy-five would like more information from their employer about how to achieve their retirement goals, and 80% would like mobile applications for managing their accounts.

“Millennials are the youngest and largest generation in the workforce,” Collinson says. “They’ve heard the word that they need to save for retirement, [and they] are doing a great job saving for retirement.”

Transamerica’s full, 94-page report, “Perspectives on Retirement: Baby Boomers, Generation X and Millennials,” can be downloaded here.

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